Against high cost and rigidity of borrowing by Nigeria SMEs

Small and Medium Enterprises (SMEs) remain the backbone of most productive economies. In Nigeria, they account for a large share of employment, innovation, informal sector productivity and grassroots wealth creation. From retail shops and agro-processing firms to fashion houses, transport operators, pharmacies and technology startups, SMEs keep commerce moving. Yet despite their importance, one obstacle continues to weaken their growth potential more than any other, which is the high cost of borrowing.

For many Nigerian entrepreneurs, access to credit is not merely difficult but it is expensive, restrictive and sometimes destructive. Businesses that should be expanding are instead trapped in cycles of debt servicing, working capital shortages and operational uncertainty. If Nigeria is serious about inclusive growth, employment generation and industrialisation, the financing environment for SMEs must be urgently rethought.

No serious business grows without finance. SMEs require funds to purchase stock, acquire equipment, pay staff, expand production, provide for logistics, bridge seasonal cash flow gaps or respond to sudden market opportunities. In an economy where inflation, exchange rate volatility and infrastructure deficits already raise operating costs, affordable credit becomes even more critical. However, many Nigerian SMEs operate with weak internal capital bases. Their retained earnings are often small, family contributions are limited and private lenders can only provide modest sums. Informal borrowing from friends, cooperatives or community networks may help at the micro level, but such funding rarely matches the scale needed for expansion.

Interest rates available to many SMEs from formal and semi-formal lenders are often too high relative to business margins. When a trader, manufacturer or service provider borrows at elevated rates, profit is quickly eroded. Instead of investing earnings back into the enterprise, the entrepreneur channels revenue into loan repayment. This creates a dangerous pattern as businesses borrow to survive, not to grow. A small factory that should purchase a second machine may instead postpone expansion. A pharmacy that should increase inventory may reduce stock levels. A young technology company that should hire skilled staff may remain understaffed. High borrowing costs therefore suppress productivity, employment and competitiveness.

Central Bank of Nigeria-licensed microfinance banks (MFBs) were established partly to close the financing gap for smaller businesses. They play an important role, especially where commercial banks show little interest in grassroots lending. Yet many MFBs face structural weaknesses. First, many are relatively small in capital size and lending capacity. They cannot consistently finance medium-scale projects requiring significant working capital. Second, their own cost of funds may be high, which is transferred to borrowers through pricing. Third, risk concentration in volatile local markets can make them cautious and rigid. As a result, many SMEs approach MFBs expecting developmental finance but encounter expensive facilities, short tenors, and aggressive repayment schedules.

One of the most overlooked problems in Nigerian SME lending is the mismatch between loan tenor and business cycles. Many businesses need time before investments yield returns. Agriculture may require planting-to-harvest cycles. Manufacturing may need months to stabilise production. Distribution businesses may rely on seasonal demand patterns. Construction may depend on milestone payments. Yet some lenders structure facilities for repayment almost immediately, with weekly or monthly obligations that begin before the financed activity has matured. This forces borrowers to repay from old income rather than new project proceeds. It weakens liquidity and increases default risk. A business loan should align with the rhythm of the business being financed. Where tenor ignores commercial reality, both lender and borrower eventually suffer.

Another major challenge is the narrow view of acceptable collateral. Many SMEs possess valuable business assets, receivables, inventory, equipment, purchase orders or strong cash turnover records. Yet lenders often insist on land titles, urban real estate or guarantees beyond the reach of genuine entrepreneurs. This excludes capable borrowers who lack traditional assets but have viable businesses. In modern credit systems, movable assets, transaction data, tax history, warehouse receipts and supply contracts can support lending decisions. Nigeria has made progress in credit infrastructure, but practical adoption remains uneven. Until lenders move beyond outdated collateral preferences, many productive SMEs will remain financially stranded and the lenders will continue to miss good patronage.

When loans become stressed, some lenders resort quickly to threats, public embarrassment, account sweeps, or coercive recovery tactics. While lenders have a right to protect deposits and capital, destructive enforcement often worsens matters. A struggling borrower may need restructuring, temporary moratoriums, revised schedules or advisory support but not humiliation. A collapsed business cannot repay anyone. Globally, smart lenders understand that recovery is strongest when both sides pursue a workable solution. Win-win restructuring preserves enterprise value, jobs and repayment prospects.

Lenders themselves also operate under pressure. Prudential rules designed to preserve banking stability may sometimes discourage flexibility in a difficult economic climate. Institutions fear sanctions, provisioning burdens or supervisory consequences if loans deteriorate. This can produce defensive lending behaviour such as strict conditions, reluctance to refinance viable borrowers, preference for short-term trading facilities or avoidance of sectors considered risky. Financial stability is necessary, but regulation must also reflect developmental realities. An economy cannot grow if capital preservation becomes more important than productive lending.

Commercial banks increasingly earn significant non-interest income from digital channels, transfer fees, account charges, cards, alerts and technology-enabled services. These income streams reduce dependence on traditional lending margins. Smaller lenders, especially many MFBs, do not enjoy the same scale advantages. They remain more dependent on loan income while carrying relatively higher operating costs. This can push them toward higher pricing and stricter recovery behaviour. The result is a paradox which is that the institutions closest to SMEs often have the least room to lend cheaply.

As a way forward, Nigeria must treat SME finance as an economic growth strategy, not merely a banking product. Key reforms should include lower-cost refinance windows for SME-focused lenders, longer-tenor facilities matched to sector realities, expanded use of cash-flow lending and movable collateral, credit guarantees that reduce lender risk, incentives for patient capital and venture funding, loan restructuring frameworks during macroeconomic shocks, better financial record-keeping by SMEs to improve creditworthiness and stronger borrower education on debt management.

In conclusion, SMEs do not ask for charity. They rather ask for fair finance. When the cost of borrowing becomes punitive, businesses cannot scale, employment cannot grow and innovation cannot thrive. Nigeria cannot build a resilient economy while starving its most productive business segment of affordable capital. The future belongs to nations that empower entrepreneurs. For Nigeria, reducing the cost and rigidity of SME borrowing is no longer optional but it is urgent.

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